The government has been urged to scrap a host of tax breaks for pensioners as part of moves to introduce a more ‘age-neutral’ tax system.
A report by liberal think-tank CentreForum, published today, said imbalances in the tax system between young and old should end, as ‘large tax breaks for affluent pensioners make no sense’.
The Tax justice: whatever your age report highlighted that the richest pensioners pay less tax than people of working age on the same income due to a range of tax exemptions.
Currently, pensioners do not pay National Insurance beyond the state pension age, even if they are still working. They are also able to take a quarter of their pension as a tax-free lump sum upon retirement, and people aged over 65 get a higher tax-free personal allowance. At £10,500, this is currently more than £2,000 higher than the £8,105 allowance for the working age population.
Chancellor George Osborne has already announced plans in this year’s Budget to abolish the additional age-related allowance by freezing it until it is matched by the main threshold for the working population.
CentreForum welcomed this move, but added the government must go further to address the other ‘perverse’ age-specific tax breaks.
Ending all three could release up to £9bn that could then be used to further increase the personal income tax threshold for the whole population. The allowance could be raised by £1,700 using the extra revenue, the report estimated.
The ability of retirees to take a quarter of their accumulated pension pot as a tax-free lump sum, up to £375,000, is a ‘bizarre – if apparently well-loved – anomaly of the tax system’, the report stated.
It added: ‘The whole point of pension saving is to ensure that people have a decent income after retirement. Allowing new retirees to take a significant part of their pension as a lump sum is counterproductive, since it reduces the annual income that they have to live on in retirement.’
Among the report’s recommendations is that the maximum tax-free lump sum should fall from £375,000 to £41,450, the level of income at which people are required to pay higher rate tax. The right to any tax-free lump should also be gradually withdrawn from those with pension pots worth more than £250,000.
National Insurance should also be levied on affluent pensioners, the report added. This is the single largest tax break currently received by people of pension age, worth an estimated £6.8bn each year.
Pensioner income should be taxed for National Insurance in broadly the same way as it currently is for income tax, the report concluded. However, the starting threshold should be set higher than for income tax, at £15,810, to ensure that no-one in receipt of means-tested benefits would have to pay more.
Report co-author Tim Leunig, CentreForum’s chief economist, said ‘the biggest financial pressures occur when you are young’, meaning that ‘large tax breaks for affluent pensioners make no sense’.
Angus Hanton, co-founder of the Intergenerational Foundation – which campaigns for fairness between generations – added: ‘Young people are financing tax breaks for older, wealthier pensioners. We need a tax system that plays fair with all generations, one based on wealth and income, not on age.’